The budget deal that passed the Senate yesterday (Wednesday) is a breakthrough for a Congress better known for its partisan gridlock, but hidden in the details is one of the best investments of 2014.
The deal represents a sharp shift for a Congress that experienced a shutdown earlier this fall and did little to compromise over values or spending for the better part of six years.
Designed by House Budget Committee Chairman Paul Ryan, R-WI, and Senate Budget Committee Chairman Patty Murray, D-WA, the compromise passed the Senate by a 64-36 vote yesterday afternoon.
Last Thursday, the deal passed the House 332-94, with majorities of both parties voting in favor.
U.S. President Barack Obama has already said he would sign the bill when it arrives on his desk.
But while Washington celebrates this tiny crumb of progress, energy investors can profit from a huge opportunity buried deep inside the deal.
Here's how this budget created one of the best investments of 2014...
A Treaty with Mexico Sets the Stage
First, a little background is in order.
In February 2012, the Obama administration signed an agreement with Mexico to develop trans-boundary hydrocarbon reservoirs in the Gulf of Mexico. The oil and gas falls in an area known as the Western Gap.
The treaty was ratified by Mexico in April 2012. Although Congress has not yet approved the formal deal, both chambers have passed versions of the bill. With a Jan. 17 deadline looming, Congress is expected to act soon.
The treaty provision in the budget deal sets a framework for U.S. companies to partner with Mexico's Pemex to produce oil and gas in the 1.5-million-acre oil field. The treaty also encourages future agreements between the two nations to jointly produce oil and gas formations that straddle international boundaries.
The deal represents a positive step for U.S. oil companies, which suffered a sharp decline in gulf production in the wake of the BP PLC (NYSE ADR: BP) Deepwater Horizon oil spill in 2010.
That's the opposite of what's been going on with oil and gas production elsewhere in the United States, thanks mainly to horizontal drilling and hydraulic fracturing. Domestic output from the Gulf of Mexico will only account for 17% of U.S. production in 2013, down from 20% last year, according to the Energy Information Administration.
But it looks like the downward trend in the Gulf is about to reverse...
Best Investments 2014: The Money's in the Gulf
With the budget deal soon to become official, several U.S. companies are in a position to profit by partnering with Mexico's Pemex.
The play in Gulf waters are the large-scale, multinational energy firms with the engineering capacity and experience in Gulf production. Such companies include Anadarko Petroleum Corp (NYSE: APC), BP, Chevron Corp. (NYSE: CVX), and Royal Dutch Shell PLC (NYSE: RDS.A).
For the past few years, investors have turned away from the Gulf.
But it's clearly time to revisit the region: 10 new mega-discoveries and an increase in production in 2014 have changed the game.
Next year, Gulf oil production in the deepest areas (where depth exceeds 1,300 feet), will reach 1.5 million barrels per day, according to Wood MacKenzie. That figure will increase to 1.9 million barrels by 2020, a record high.
The budget deal only sweetens long-term opportunities in the Gulf, where the U.S. Department of the Interior estimates another 48 billion barrels of oil sit undiscovered.
That little-discussed provision of the budget deal will encourage greater development and exploration between the two governments. Meanwhile, American companies will continue to innovate in offshoring drilling technologies and reservoir surveying techniques to improve access to unconventional sources and improve rig profitability.
For investors, it's time to put leftover concerns about the BP oil spill behind us. The budget deal shows that despite his anti-fossil fuel rhetoric, President Obama is willing to allow more development and encourage a greater partnership in developing one of the best investments of 2014.
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